Endowments receive poor marks on socially responsible investing
GLOBAL - Endowments are no longer leaders in environmental, social and corporate governance (ESG) investments, a study has revealed.
The report - entitled "Environmental, Social and Governance Investing by College and University Endowments in the United States: Social Responsibility, Sustainability and Stakeholder Relations" - also found that a number of colleges and universities claim to make sustainable investments when they do not meet the standard definitions of such investments.
Jon Lukomnik, executive director at the Investor Responsibility Research Center (IRRC) Institute, which commissioned and funded the study, said: "The findings are somewhat counter-intuitive to what one would expect from the university community.
"Historically, endowments were groundbreaking institutional investors that addressed social and environmental considerations in their investments far earlier than others.
"Our findings indicate that today's endowments no longer are leaders in the institutional ESG investment arena."
The report also found a general lack of transparency on ESG practices.
Lukomnik added: "Investment policies are remarkably opaque, even at some state-funded universities.
"We also find that the educational community largely is absent from the national and global institutional investment networks.
"For example, not a single endowment is amongst the 900 signatories of the UN Principles for Responsible Investment, and only one is a member of the Council of Institutional Investors, the leading US association of institutional investors."
The report's key findings are as follows:
• The primary form of ESG investing activity by endowments tends to remain single-issue negative screening of public equity portfolios related to issues such as tobacco or targeted divestment from the Sudan.
• Increasing numbers of surveys and reporting mechanisms have emerged over the last decade to obtain information about sustainable and responsible endowment management. Yet a widespread lack of independent verification of self-reported data exists. Moreover, there is confusion about the semantics of ESG investing, resulting in problematic claims and misclassification of investments. And despite the proliferation of surveys, ESG investment transparency remains poor.
• Considerable focus is placed on proxy-voting recommendations. Yet many colleges are shifting investments from publicly traded securities to indirect investments in commingled vehicles and more opaque, illiquid investments in alternative asset classes, meaning that traditional equity investing, including proxy voting, is a decreasing portion of many endowments. There is little consideration by endowments of ESG issues in non-public equity asset classes despite some interesting but small ESG programmes in different asset classes.
• The endowment community exhibits a weak understanding of ESG investing strategies, trends, opportunities and language. Also, there is no standardised conceptualisation of sustainable and responsible investment activities that are widely practiced in the capital markets.
• Endowments are absent from leading investor networks where ESG investment issues are routinely discussed.
• Misperceptions about ESG investing open immense learning opportunities for the endowment community, though a much greater openness to discussions of sustainable and responsible investing is needed. Endowments desiring to understand the current state of ESG research and application will need to join these conversations and begin convening their own dedicated, multi-stakeholder networks.
• Small-scale experimentation is occurring in areas such as microfinance investment, student-run socially responsible investment funds, green revolving loan funds and shareholder advocacy.
The study notes that, when sustainable investment programmes are initiated, it is because of the unique nature of educational endowments, which typically have more constituencies than other institutional investors.
These constituencies often include students, alumni, donors, faculty, staff and administrators, trustees and community groups that can have competing stakes and exert pressure on endowments.
Joshua Humphreys, the study's lead author and fellow at Boston-based think tank Tellus Institute, which conducted the research, said: "Stakeholder dynamics are key to understanding sustainable and responsible investing by college endowments.
"What little uptake we observed of ESG investing among endowments can repeatedly be traced back to schools responding to the demands of students, alumni and donors, faculty and staff and non-profit and community groups.
"Colleges are far less proactive in the ESG investing space than one would expect from mission-driven institutional investors."
The report addresses three broad areas - the incorporation of ESG criteria into endowment management, shareholder advocacy and active-ownership initiatives and the governance and transparency of ESG investment decision-making.
US college and university endowments have more than $400bn (€326bn) in combined assets under management.